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09 Mar 2015
Approximately $5 billion of debt affected
New York, March 09, 2015 -- Moody's Investors Service said that General Motors Company's
(GM) ratings (including its Baa3 credit facility rating which contingently
benefits from domestic subsidiary guarantees and its Ba1 senior unsecured
note rating) are unchanged following the company's announcement
that its board approved a new capital allocation strategy. This
strategy will include: a $5 billion share repurchase program
to be completed by the end of 2016, a dividend policy that should
amount to $5 billion for 2015 through 2016, and a $20
billion targeted cash position. The rating outlook remains stable.
Also unchanged are the Ba1 senior unsecured rating and stable outlook
of GM Financial which benefit from a support agreement from GM.
Although GM's ratings and stable outlook are unchanged by the capital
allocation program, the initiative represents a negative credit
development. Bruce Clark, Senior Vice President with Moody's
said, "This program weakens GM's positioning at the
current rating level and will likely delay any potential consideration
for an upgrade." Higher ratings are important to GM because
of the significant ongoing borrowing requirements of its captive finance
operation -- GM Financial.
The key credit risk associated with the capital allocation plan is GM's
decision to effectively fund its share repurchase program by reducing
the liquidity position of its automotive operations by about $5
billion in the face of a number of operational and financial challenges.
Moreover, despite GM's stated intention of maintaining an
"investment-grade balance sheet", the reduction
of its targeted cash position to $20 billion from a previous targeted
range of $20 billion to $25 billion, combined with
the plan to return all available free cash flow to shareholders,
represent a clear increase in the company's credit risk profile.
Before the impact of any recall-related and other one-time
items, GM's credit metrics for 2014 and those we anticipate
for 2015 are broadly consistent with the company's current rating
levels. However, the 2014 metrics were severely stressed
by the recall-related and one-time items, and we expect
that 2015 metrics will also remain weakened as these expenses and expenditures
continue to be incurred. Moody's Clark noted that,
"GM is committing itself to a large shareholder reward initiative
when its metrics are being pressured by the recall. It's
going to take some time to re-establish the operating and financial
cushion that might support any improvement in the rating."
GM's gross automotive liquidity will fall from about $33
billion ($25 billion in cash and $8 billion in automotive
credit facilities) to $28 billion ($20 billion in cash and
$8 billion in credit facilities). This decline in liquidity
will occur as GM contends with weak automotive markets in Latin America,
Russia and many markets in South East Asia. In addition,
during 2015 the company will face another year of sizable losses in Europe
and by 2016 it will begin to approach only breakeven performance in the
region. Finally, the US auto industry's current UAW
contract expires during September 2015, and GM will have to contend
with negotiating a new contract with the union after committing to make
significantly larger distributions to shareholders.
Beyond these operational challenges, GM will have to fund a number
of items during 2015 and possibly 2016. These items include:
approximately $1.2 billion in continued recall-related
expenditures; payments related to its $400 million ignition
switch victim compensation program; litigation costs that might arise
from plaintiffs who opt out of the GM compensation program; and,
the possibility of significant fines and penalties that might be imposed
by the US government due to the faulty ignition switches.
GM will also have to contend with the highly cyclical nature of the auto
industry and its vulnerability to unexpected shocks. One of the
fundamental ways of contending with the risks in this industry is to have
a robust liquidity profile. The liquidity position that GM has
chosen to run with as a result of this new shareholder distribution plan
remains adequate, but will be notably less robust than it would
have otherwise been.
GM's formidable position in North America enabled the company's
overall automotive operations to generate the following metrics during
2014 (before recall-related and other one-time costs,
but including Moody's standard adjustments): EBITA margin
of 4.6%; debt/EBITDA of 3.0x; and EBITA/interest
of 4.0x. These metric levels are consistent with the company's
current ratings. However, a recognition of the recall-related
and other one-time items results in much weaker metric levels:
EBIT margin of 1.5%; debt/EBITDA of 4.8x;
and EBITA/interest of 1.3x.
GM's stable outlook is supported by the its strength in North America
and China , the gradual progress the company is making in stemming
losses in Europe, and by a liquidity position that, although
reduced, will still be adequate to contend with the volatility in
the auto sector and the company-specific risks facing the company.
However, Moody's does not expect metrics to strengthen to
levels that might support a higher rating until sometime during 2016.
Metrics that could contribute to a positive rating action include:
EBITA margin above 7.5%; debt/EBITDA remaining below
3x; and EBITA/interest above 5.5x.
The most likely source of pressure on the rating would result from a decision
to maintain a cash position lower than the $20 billion level contemplated
under the proposed capital allocation plan or to increase debt in order
to fund share repurchases. The rating would come under pressure
if the company's 2016 metric levels were on track to approximate
the following levels: EBITA margin remaining below 5%;
debt/EBITDA of exceeding 3.5x; and EBITA/interest below 3.5x.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Jesse B Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Robert P Jankowitz
MD - Corporate Finance
Corporate Finance Group
Moody's: GM's share repurchase plan is negative credit development; Baa3 credit facility rating and stable outlook unchanged.
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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